Q2 2020 DIRTT Environmental Solutions Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the dirt Environmental solutions Twentytwenty second quarter financial results Conference call.
At this time all participants mine.
Our in listen only mode.
Following the presentation, we will conduct a question and answer session for analyst.
To ask a question. During this session you want me to press Star one on your telephone.
If you require any further assistance please press star zero.
I would now like to have the copies sold to a speaker for today, Kim Mccaghren director of Investor Relations Twitter. Please go ahead ma'am.
Thank you good morning, everyone and welcome to today's call to discuss <unk> second quarter 2020 results.
Joining me on the call our Dirts, Chief Executive Officer, Kevin Nomura, and Chief Financial Officer, Jeff close.
Management's prepared remarks today are accompanied by presentation slides access to slides. Please view them from the web page of this webcast or go to the Investor section of Darts website.
Earnings Press release that was issued yesterday afternoon can also be found on our website.
Today's call will include forward looking statements within the meaning of applicable Canadian and United States Securities Law.
These statements are based on the company's current intense expectations and projections they are not guarantees of future performance.
In addition, this call will include references to non-GAAP results. Excluding special items. Please reference our form 10-Q as filed on July 29, 2020, with the Securities and Exchange Commission or FCC and the other reports and filings with the FCC for information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.
Ill also remind you that this webcast is being recorded an a replay will be available today at approximately one PM eastern time.
I'll now turn the call over to Kevin.
Thank you Kim and thank you everyone joining us today, starting on slide four obviously, it's been a challenging time in the construction industry as all of US we'll have to deal with the impact to be covert 19 pandemic on our business and there are many ongoing uncertainties. It has created.
Some room first quarter their children deferring some projects due to either full job site shutdowns or slowdowns.
Nonetheless at $42.2 million, our second quarter revenue slightly exceeded our first quarter revenue.
We delivered modestly positive adjusted EBITDA and we maintained our strong balance sheet ending the quarter were just under $45 million with cash.
Although to date commercial in health care organizations appear to be taking a measured approach to modifying spaces in reaction to covert 19, we continue to believe the long term impacts of the pandemic on our business have the potential to be positive accelerating the ship to prefabricated offsite construction entered dirts modular product suite.
Cost reductions and onsite labor to to physical distancing can adversely impact construction schedules and costs, both of which a hurdle dessert can help overcome.
Increased focus on infection control and risk mitigation and office environment May call for reduced density increased use of private offices and other separation strategies, all of which could increase the per square foot content of dirt solutions.
Perhaps most importantly spaces will need to evolve through changing circumstances in recent months the nature of the conversation with our clients has began migrating from historical focus on budget and schedule over runs to fear spending millions of dollars billing is space only to find it it's not appropriate for the organization given current circumstances.
We are hopeful these concerns provide a catalyst that accelerates the trend to offside construction.
And take full advantage of these opportunities and drive our market penetration, we've been continue to implement albeit on a cost conscious manner. The strategic plan, we announced last November which focuses on commercial execution manufacturing excellence in innovation.
Turning to slide five and six the most visible example of our progress was the launch of dirt first ever comprehensive strategic marketing campaign in early July.
The campaign is called make space for possibilities and runs until the end of 2020.
It positions dirt solutions to meet evolving needs of individuals teams and organizations seeking greater adaptability within their workplaces and real estate portfolios as they continue to navigate change.
Theres advocacy campaign unifies, our sales marketing and product innovation efforts.
We also worked closely with our distribution partners to develop the targeted accounts advertising strategy to support their sales effort within key verticals and the specific end users.
Is designed to bolster dirts mind in market share and strengthen both existing market opportunities and target new ones.
It is fully supported with a suite of sales tools for both our partners and our reps and includes a robust devaluation platform to measure reach engagement and conversion to ensure campaign optimization.
Most importantly, he was a fully integrated strategy to coincides with the rollout of phase one of our CRM system.
And includes multi layered lead capture a built in through the visitor journey.
As a sophisticated deployment of the dirt brand drawing from the deep expertise recently added to our commercial team.
A program of this magnitude simply would not have been possible 18 months ago, and I think would be the envy a much larger and more established companies.
In addition to the makes based campaign and turning to slide seven we continue to make progress with every aspect of our strategic plan.
We completed the hiring of our sales leadership team with the director ports to our Chief commercial officer, and Vice President of sales now fully onboard.
This included welcoming Mark Kinzer is director of strategic accounts and enterprise sales.
March extensive industry experience includes five years as president of trend way of commercial furniture and interior solutions manufacture.
And 25 years and senior sales positions with Herman Miller, most recently as senior Vice President of sales.
I am confident mark will be a key leader for our strategic accounts in large project strategies and I look forward to working closely with him.
We also hired a fourth regional sales director finalizing the team will oversee regional sales going forward and we welcome to five new partners during the quarter three in the central Us and one each.
Of the western and southern regions. We are encouraged to see early momentum with our new partners as several who joined US earlier in the year already booking orders.
Within our manufacturing operations, our safety culture is now well ingrained and we continue to achieve recordable incident rates more than 75% below industry standards.
Having turned our focus to quality initiatives in the second quarter, all our plants exceeded their goal of reducing external quality issues by 50% relative to 2019.
As we now embark on the process of improving the efficiency and cost effectiveness of our operations. We remain on track to complete our significant step function improvement by the end of this year.
And migrate towards a continuous improvement mode next year.
The building that will house on Carolina plant located 30 minutes from the Charlotte Airport is complete and we received our first shipment of equipment in July.
We remain on schedule for commissioning the plant in the first half of 2021.
Turning to slide eight as you may recall in June 2020, we announced our commitment to an ongoing board renewal process as part of that process I'm very pleased to announce the microport and Sean a keen will be joining our board on August.
Michael was ahead of global real estate and security for Microsoft with responsibility for a multibillion dollar real estate portfolio that includes more than 38 million square feet across 113 countries.
As an accomplished professional in one of our target customer segments, namely count intensive businesses. He brings valuable perspective on integrating technology into real estate within sight and advancements in virtual reality and artificial intelligence.
Sean It was formerly Vice President Finance and business operations for Yale University and prior to that held many leadership positions with Pepsico, including Global Chief Information Officer, and Chief transformation Officer.
In addition, her financial expertise in prior experience as a public company Board member China brings insight in perspective on overseeing major transformational efforts and managing the implementation of technology.
Today, we also announced and Christine Mcginley as resigning from our board effective August 30 Onest.
This has been a director of dirt since 2013 and was instrument and leading the board's efforts in relation to our recent NASDAQ listing and related conversion from FRS accounting to us cap. We thank her for her many years of service.
As of August Onest, both Michael and Sean will join the company's audit Committee in China will assume the role of audit Committee chair.
The progress we've made in implementing a strategic plan highlighted by the additions to our management team and launching of our make space from possibilities campaign helps to drive our confidence in d'oeuvres future.
Such as we're doing everything possible to properly position during the marketplace. The continued economic uncertainty from the global coven pandemic and its impact on the markets, we serve must be acknowledged.
The timing for when the results of our efforts will be realized in our financial performance remains uncertain.
But our determination to exit this period of and certainly from a position of strength is undeterred with that I'll turn the call over to Jeff for financial overview.
Thank you Kevin.
Before turning to the quarterly results I'd like to recap the steps we've taken from a liquidity standpoint summarized on slide nine.
As we discussed in our Q1 call early and Twentytwenty, we undertook a fulsome review of our credit facilities.
During the second quarter, we completed the definitive documentation on a covenant holiday for our current credit facility. This holiday extends to September thirtyth.
At that time, we anticipate that we will either extend that relief or formally convert to an asset backed line depending on the circumstances.
While we currently have $12.8 million available under that facility it remains undrawn.
In the second quarter of 2020, we established Canadian and US dollars lease financing facilities, we true Canadian 3.6 million of the Canadian leasing facility in the second quarter to finance equipment purchased in Canada in 29 team.
The U.S. leasing facility will be used to fund the equipment purchases for our New Carolina plant.
We expect to draw on the facility in the late third and fourth quarter of 2020 has the equipment arrived on site.
This includes the financing of $4.7 million of deposits that were paid and 29 team, bringing that cash back onto our balance sheet.
During the quarter. We also qualified for approximately 4.3 million of Canadian emergency wage subsidies from the Canadian government for the April to June period of this amount 1.6 million was received in June with the balance expected to be received in the third quarter.
The Canadian government recently passed legislation to extend the availability of Q3 December 19th 2020, introducing a sliding scale to the subsidy relative to the amount of Canadian dollar revenue decline.
We will continue to evaluate or eligibility and intend to apply for such subsidies.
Clickable.
[noise], our working capital management focus also continued in the second quarter with no reportable disruptions or delays in accounts receivable collections and a slight improvements in days sales outstanding net of deposits to 29 days.
As a result of these activities. We finished the second quarter with cash balances of 44.6 million a slight increase from the $43.5 million of cash report at March 30, Onest Twentytwenty.
Our net working capital as at June Thirtyth was 52.2 million compared to 51 million at March 30 Onest.
Our current ratio remains healthy at 2.5 times versus 2.4 times at March 30, Onest and 2.7 times at December 30, Onest 29 team.
With that background lets now turn to the second quarter results on slide 10.
Revenue for the second quarter was 42.2 million a decline of 34% from the comparable period of 2019, but up marginally from the first quarter.
As Kevin mentioned average daily order entry through Q2 was consistent with Q1 and this level has continued into July.
However, we're not immune to the effects of Covance and the related restrictions, which affected project execution on site.
We estimate approximately $3.7 million of projects that work that we were confident of second quarter delivery at March 15 were deferred to future quarters.
In addition, given our short lead times, there were other opportunities that likely would come to fruition absent cobot that were delayed or deferred.
The amounts of those deferred opportunities however is not possible to reliably quantified.
While the job sites situation remains fluid and regionally dependent, particularly as infection rates surge in certain parts of North America, we expect that to some degree the uncertainty resulting from co, but we'll continue to impact projects through the remainder of Twentytwenty.
Okay.
On slide 11, adjusted gross profit margin was 38.2% in the second quarter a declined from 42.1% from the comparable 2019 period and consistent with Q1 of this year.
During the quarter, we reduced the warranty provision related to timber as previously discussed to 1.3 million from 2.5 million as we identified improved and instead choose solution.
Having said right sized our factory labor in Q1 and very early in Q2. This quarter contains no adjustment for costs related to our underutilized capacity within cost of sales recall that in the first quarter of 2020, we separately classified 2 million of underutilized capacity and cost of sales and excluded those costs.
Adjusted gross profit.
The decrease from the comparable 2019 period is primarily due to fixed cost leverage on lower revenue and approximately point 5 million of severance costs in the current corridor.
Turning to slide 12, which details the breakdown of operating expenses I would like to specifically discuss the sales and marketing expenses, which vary to a greater degree from comparable 2019 period and from the first quarter of 2020.
Well variable comp commission was down on lower revenue numbers relative to last year. We also benefited from cost reductions and deferrals that came as a direct result of travel and other restrictions due to cobot.
In particular, I would highlight that travel and entertainment expenses and marketing and trade shows were down a combined 1.3 million, we're unsure when or if this is this will return to historical levels. It is reasonable however to assume that is economies begin to open up and sales activities return we would see.
An increase from current levels.
In addition, marketing and specifically trade shows declined as we deferred hosting our annual connects trade show in June of this year.
Lastly in the second quarter of 2019, we incurred 1.3 million of consulting costs related to the development of our sales and marketing strategy, which did not recur in twentytwenty.
Similarly, gnh benefited from lower travel and entertainment as well as reduced building operating expenses, reflecting the work from home status of most of our head office employees.
Operation support reflects reduced travel combined with consulting expenses in 2019 that did not recur.
[noise] looking at slide 13, adjusted EBITDA and adjusted EBITDA margin for the quarter decreased to point, Threemillion, and 0.6%, respectively, compared to 6 million and 9.4% respectively for the second quarter of 2019.
This decrease was driven primarily by the $10.9 million decrease in adjusted gross profit and point 9 million on account of higher legal costs incurred in 2020.
These reductions in adjusted EBITDA were partially offset by reduced commissions on lower revenues and decreased spending on travel meals and entertainment, including trade shows due to covert 19, as well as cost reduction initiatives.
In 2019, we incurred $1.3 million of consulting costs incurred for sales and marketing plan and point 4 million related to the listing of the company's common shares on NASDAQ in 2019 that did not recur in twentytwenty.
I would reiterate that adjusted EBITDA for the quarter reflects a $1.2 million recovery for the timber provision and lower expenses due to cobot related restrictions I would also note that we removed $4.3 million benefits of the Canadian emergency wage subsidy from the calculation of adjusted EBITDA.
Turning to slide 14, net income for the second quarter was point $3 million or nil per share comfort compared to net income of 2.6 million or three cents per share for the second quarter of 2019.
This was driven largely by the reduction in gross profit higher stock based compensation, an increased foreign exchange losses, partially offset by 4.3 million of the Canadian emergency wage subsidy reduced SG any costs. It described previously and lower income taxes.
To be clear our stock based compensation in Twoq 2020 was 400000 versus a recovery of 1.7 million for the same period of 2019, when we used liability accounting due to temporary cash settlement of options that ceased upon our us listing in the fall of 2019.
Excluding the cost of equipment and commissioning of the South Carolina plant. Just described previously and which is largely funded by our new equipment leasing facility. We now expect our ongoing capital expenditures for 2020 to be between eight and $10 million directed mainly towards our DST refresh in Chicago and our new Dx.
I see in Dallas commercial systems implementation and software development activities.
Let's now touch on our outlook on slide 15.
Given where dirt fits in the construction schedule typically closer to completion. Our current deliveries are for projects that we're well underway as the cobot 19 pandemic hit North America.
While our average daily order entry levels for July have been consistent with the average daily order entry for the first half of this year the outlook for the remainder of the year continues to be very uncertain due to the effects of Cove. It.
In addition.
While we have made substantial improvements within our commercial organization and have undertaken comprehensive brand awareness activities. The timing of the positive outcomes of these efforts remain send determinable, particularly in light of the cobot environment. We're confident that we will continue to have the balance sheet to support operations going forward, but remain.
And ready to reevaluate potential actions should business conditions deteriorate.
Operator, we would now like to open the call for questions.
Thank you at this time, we will conduct a question answer session for analysts to ask a question you will need to press star one on your telephone.
To withdraw your question press the pound key please standby, while we compile beginning roster.
Your first responses from John Wilson of Raymond James. Please go ahead.
Yes. This is Josh thanks for taking my questions Kevin in check.
Yes.
Could you talk about what the current focal points are in the commercial transformation now that all of the Jennifers hires are in place on the first phase of the system has said.
Yes.
It's multifold and it really hasn't changed we still have some conditions, we need to hire within the sales organization. It's work he can get people onboarded and effective as soon as possible.
It's continuing to enhance our sales age and sales management and then on the systems side, It's rolling out our total cost of ownership tool our phase two of our CRM system, which we think will be done by the end of the year as well as the aren't hams partner portal and helping our partners with their marketing efforts.
And what progress have you made on the national account side.
Well, we've made good progress we've got several very interesting conversation, so I'm going to taking place.
In variety of different stages, and so we feel very good about our progress today.
Okay, and then what's a sentiment like among your distribution partners on this or any color. There given you that has changed in any way from three months ago.
It's mixed.
The quoting activity in the core business has really not fallen off dramatically, but what everybody is waiting to see is do those turn into orders for 2021. So.
There's reason to be optimistic because the activity is reasonable, but news reasonably pessimistic because there's still a little bit of time to go before turning to order. So I would say probably cautiously optimistic.
Got it all handed off to others.
Thank you you finish responses from Nielsen sale of industrial Alliant security.
Hey, good morning, guys.
Running on yeah actually it my first question you kind of just asking it was really I'm just wondering if there's any more color you can give on.
The quoting activity, obviously with daily order entry, that's really kind of the loss stack, the new and have a pipeline of 12 18 24 months of discussions with clients before you actually get to where you started the the lead time on the delivery.
So can you give us any extra color on how that those discussions are developing and if you're seeing a difference between say the healthcare or the.
The office market government okay.
I don't know that I've gotten great meaningful.
Color to provide.
I would say, we immediate flashes of some cobrand specific things.
Then we will quote from time to time, the vast majority of more existing in the core business just kind of routine projects, where people are either relocating expanding what they're doing et cetera et cetera, as part of the struggle that you mentioned your question isn't it a warning things we've been working on his green.
Much refining how we manage our pipeline what level of activity in quoting.
Merits getting place them, a pipeline and so forth and so we don't have really great comparable data to go back and say, okay, a year ago on a comparable basis.
Our activity was X amount was killed this level. So we're still kind of five to finding our way is that process matures.
Okay, so to sum it up basically cautiously optimistic but no specific segment.
It was really giving you any more confidence about than others.
Hi, Thanks care that fair way to think about.
Okay, and I know I mean, the situation seems to change day to day or sometimes out of the hour.
But when the code that impact is there anything that you're seeing.
From the conversations that you are having.
About how customers are thinking are they thinking about redoing existing office space more or they are thinking about.
New.
New developments and those are you know might be on hold but now they're thinking about going into them, but with a different kind of mindset and anything like that we're seeing.
Yeah, and yes, and you really need to have a dichotomy.
When you have conversations about longer term projects and how they're thinking about.
Executing as projects going forward there much more interested in prefabricated and offside and kind of gets to the prepared remarks were now we're having direct conversations about people being concerned that I just spent millions of dollars on a go through Oct space and so that's what gives us optimism for the long term does.
This model and where we will ultimately ahead and being able to convert people tar way of building in the short term people are still feeling our way there's still trying to figure out. Okay. How are my people doing in work from home and you can see even in the popular president and we're seeing this with our client conversations as well which is at first.
It was kind of a newfound touched this is great and now it's starting to wear on people and they're starting to body weight. So we need to do something different I think we're going to go through waves that I think you're good at waves, where people do very quick inexpensive and not particularly great solutions, and then they're going to say well I need to figure out how to live with this for a while and then I think thats, where we may come in.
Wave two of we need to quarter space together in a way that is more sustainable way to work, but also gives us the flexibility to make changes going forward.
Yeah, I definitely think what this environment should be should be favorable for your offering.
So maybe just finally have you seen any kind of interest in more face to face meetings or I'm wondering when that sales and marketing expense line might start to uptick any visibility on that at all.
It's hard to say, we're seeing local travel are people into market by market basis, and we're really relying on the individual judgment, but its our people in their local markets traveling the food shelf sent off to recognize is that there's still a very strict 14 day quarantine.
Period for somebody traveling from United States into the province of Alberta World are totally operations are based and so you're not seeing travel either Canadians coming down in the United States, knowing that they've got to get home or vice versa, and so that a significant portion of expenditure that I don't think you'll see change much.
Until that quarantine restrictions lifted.
I think to add to that Neil is that there are face to face conversations that are happening within within the regional the regional areas.
We have a.
Widely dispersed salesforce that.
That effectively partners with our distribution partners and quite frankly, our distribution partners also have a salesforce on the ground as well.
Which ah, which is complementary and so.
I think as those those conversations are starting to happen, but but certainly the air travel and those sorts of things Eva for guys like me and guys like Kevin are tapping as well so.
Okay. Appreciate it thanks.
Again to ask a question. Please press star one on your telephone keypad.
Your next responses from Rupert Merer National Bank. Please go ahead.
Good morning, everyone.
Hi, Robert <unk>.
So with the reduction in operating staff in the last quarter can you talk about your production capacity today, you're carrying much excess capacity and you have the ability to flex up or down anymore. At this time.
We typically excuse me capacitized ourselves to be able to swing.
On the week to week basis, 15% to 20%. So we've got some.
Some slack capacity in the system, but to go much beyond that would require us to to increase our staffing levels, it's not a and equipment or facilities restraint, it's purely.
With people.
And with building the the new facility. So you target 10 naphthalene of investment this year one of the plans right now for the facility in light of your lower production levels, how how far do you take this facility will ultimately operate this facility once its commission.
As it as it stands or or do you think that maybe maybe you will slow things down the.
We will fully commissioned and operated on the cost spaces, particularly on the logistics and freight savings for south Eastern Med jobs, who is very compelling and the incremental cash expenditure, particularly with capital lease financing was.
Would you not overly meaningful and so it was not a difficult decision to say after you set aside because Oregon, we will contractually committed to what would the incremental cash from our balance sheet need to be in order to get it fully functioning and capture they savings and the activity level to make that and good investment is not particularly.
Hi.
Alright. Thanks. So then turning to your your distribution partners. So you added five this quarter.
And reduced by three you mentioned that some of the new partners are already contributing.
To the order flow can can you talk about how the activity levels burying across the network are you seeing.
All of your distribution partners, all trading or are there. Some that are offline now and are there any that are or maybe things stronger order flow in this market.
On the ones that are have been motion reduced activity, although it's starting to change, but if you look at around the corner basis would be like New York and Boston in Northern California, where jurisdictionally jobs has been pretty much shutdown.
So those are starting to open up more she's seeing a little bit more there.
Beyond that it really is project based and so at any point in time. It somebody has a large project if they've been working on I don't know from a quoting standpoint, if there's any place we can highlight where one is more.
Motivating are having a higher quoting and experience going anywhere else.
And your your presentation shows you have 80 distribution partners now how has that changed over the last couple of years remind me.
Whereas the number has come from and where do you think you go here you go from here do you look to increase the number of distribution partners furthers, our or benefit to doing so.
I'm going to like generic answer that question a in detail and just share with you that we've kind of in changing how we how we calculate that number I'll check into more detail interim here strategically.
By and large what we've done is one of two can either upgrading a an underperforming partner or adding partners to get enhanced market coverage.
Ideally, we would have to existing partners increased the business that they're doing and help them and support them doing that in places, where we think that we're underpenetrated mass not likely we are prepared a cat and distribution partner.
Yes, I'd say Rupert we're probably up.
Net net for net side.
Relative to where a couple of years ago, a we've added a we've added a number but we've also.
Remove the some lower performing partners, so I'd say.
I'd say that it's it's an improvement in the quality of the network and we are slightly higher but not by a material amount.
All right I'll leave it there thank you.
Thank you. Your last question is some Greg palm.
Craig Hallum Capital Group. Please go ahead.
Hi, guys as Danny Irish on for Greg Today, No you gave the comments on kind of average daily order throughout Q2 I was wondering if you could give some color on.
Maybe some monthly order trends as you saw as we move throughout the quarter.
Jeff Here you know if it was it was fairly consistent I'd say we saw.
A.A., perhaps a slight slowed down a mid quarter.
It it bumped up.
A little bit into June.
But it's been it's been very.
It's been quite variable we've seen some some really strong order days we've seen.
Who really weak quarter days.
And so it's it's difficult to to see a pattern apart from looking at an overall weekly basis and I'm not weekly basis. Its it has definitely held in there.
To that extent.
All right got it I guess as we look forward to kind of the pipeline for Q3, what's your feel around the potential for additional project delays that you expected to hit in Q3 kind of similar like to like to 3.7 that you saw this quarter.
That's that's really tough to say advantest kefir, it's really tough to say you know I I think.
We've we've seen some stuff move around certainly I'd expect to you know.
It would be.
Around that level, but it is really regionally dependent it's really project dependent.
And so I I would say you know you you could you could probably have a rolling number somewhere around that 3.7, perhaps a little by little bit less in the third quarter, but.
I think we're going it continues to see this moving forward and and.
It's it's super fluid, particularly if you can operate on a construction sites or if you get a city that goes to lock down or stuff like that so.
Great and then last one from me I'm just looking at your distribution partners. How are you seeing I guess kind of the health and stability or some of those are you concerned with that at all.
On the data center I know, we're not I'm you know we've been keeping very close tabs.
With the with our partners.
If we were seeing problems you would've seen and an uptick in our allowance for doubtful accounts, which are you did not see this quarter.
And in fact, as I said, our Dsos gone down.
We're continuing to have ongoing discussions our partners themselves have also had to take appropriate actions within their businesses.
To make sure that that to they remain healthy.
And able to to move forward and and.
Many of them many of them half so.
All right that's a that's it for me thanks guys.
Thank you there no further questions in the queue at this time.
Thank you operator, as you've heard we've come a long runway in recent months before closing I'd like thank our tremendous employees and partners, who demonstrated resiliency and commitment in the face of extraordinary circumstances their dedication endured in our collective mission is the foundation of everything we do thank you for joining us today.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a good day.
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[music].
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Ladies and gentlemen, thank you for standing by and welcome to the dirt Environmental solutions Twentytwenty second quarter financial results Conference call.
At this time, all participants' lines are in listen only mode.
Following the presentation, we will conduct a question answer session for analysts.
To ask a question during this session the only to press star one on your telephone.
If you require any further assistance please press star zero.
I would now like to have the copper told you a speaker for today kept Mccaghren director of Investor Relations Twitter. Please go ahead.
Thank you good morning, everyone and welcome to today's call to discuss during second quarter 2020 results.
Joining me on the call or Drutz, Chief Executive Officer, Kevin Nomura, and Chief Financial Officer, Jeff crops.
Management's prepared remarks today are accompanied by presentation slides OXXO supplies. Please do them from the web page of this webcast will go to the Investor section of Darts website.
Earnings Press release. It was issued yesterday afternoon can also be found on our website.
Today's call will include forward looking statements within the meaning of applicable Canadian and United States Securities Law.
These statements are based on the company's current consensus expectations and projections. They are not guarantees of future performance.
In addition, this call will include references to non-GAAP results. Excluding special items. Please reference our form 10 Qs filed on July 29, 2020, with the Securities and Exchange Commission or STC and other reports and filings with the FTC for information regarding forward looking statements and reconciliations of non-GAAP results to GAAP results.
I loved to remind you that this webcast is being recorded replay will be available today at approximately one PM eastern time.
I'll now turn the call over to Kevin.
Thank you Kim Thank you everyone joining us today, starting on slide four obviously, it's been a challenging time in the construction industry. There's all this work to deal with the impact of the Cobot 19 pandemic on our business and that many ongoing I'm certain that use it is created.
Sure. We're the first quarter their children, depending on some projects due to either full jobsite shutdowns or slowdown.
Nonetheless at $42.2 million, our second quarter revenue slightly exceeded our first quarter revenue.
We delivered modestly positive adjusted EBITDA and we maintained our strong balance sheet ending the quarter were just under $45 million a cash.
Although to date commercial health care organizations appear to be taking a measured approach to modifying spaces in reaction to cope with Nike we.
We continue to believe the long term impact to the pandemic on our business have the potential to be positive accelerating the ship to prefabricated offsite construction actually dirks modular product suite.
Forced reductions in onsite labor due to physical distancing can adversely impact construction schedules and cost both of which a hurdle dessert can help overcome.
Increased focus on infection control and risk mitigation office environment may call for reduced density increased use of private offices and other separation strategies.
All of which could increase the per square foot content of dirt solutions.
Perhaps most importantly spaces will need a bulk of changing circumstances in recent months the nature of the conversation with our clients who began migrating from historical focus on budget and schedule longer runs to fear spending millions of dollars gilenya space only to find it it's not appropriate for the organization given current circumstances.
We are hopeful these concerns to provide a catalyst that accelerates the trend topside construction.
Take full advantage these opportunities and driver market penetration, we've been continue to implement albeit at a cost conscious manner. The strategic plan, we announced last November which focuses on commercial execution manufacturing excellence innovation.
Turning to slide five and six the most visible example of our progress since the launch of <unk> first ever comprehensive strategic marketing campaign in early July.
The campaign is called make space for possibilities and runs until the end of 2020.
Positions dirt solutions to meet evolving needs of individuals teams and organizations seeking greater adaptability within their workplaces and real estate portfolios as they continue to navigate change.
There's advocacy campaign unifies, our sales marketing and product innovation efforts.
We also worked closely with our distribution partners to develop the targeted accounts advertising strategy to support their sales effort within key verticals and the specific end users.
It is designed to bolster dirts minded market share and strengthen both existing market opportunities and target new ones.
It is fully supported with a suite of sales tools for both our partners and our reps and includes a robust devaluation platform to measure reach engagement and conversion to ensure campaign optimization.
Most importantly, he was a fully integrated strategy that coincides with the rollout of phase one of our CRM system and includes multi layered lead capture built in through the visit her journey.
As a sophisticated one of the dirt bran derived from the deep expertise recently added to our commercial team.
Personally this magnitude simply would not impossible 18 months ago, and I think wouldn't be the envy a much larger and more established companies.
In addition to the makes based campaign and turning to slide seven we continued to make progress with every aspect of our strategic plan.
We completed the hiring of our sales leadership team with the direct reports to our Chief commercial officer, and Vice President of sales now fully onboard.
This included Walker remark Kinzler is director of strategic accounts in enterprise sales.
Marching extensive industry experience includes five years as president of trend wise, a commercial furniture and interior solutions manufacturer.
25 years in senior sales positions with Herman Miller, most recently as senior Vice President of sales.
I'm confident mark will be a key leader for our strategic accounts in large project strategies and I look forward to working closely with him.
We also hard to fourth regional sales director finalizing the team will oversee regional sales going forward and we welcome to five new partners during the quarter three in the central U.S. and one each.
Of the western and southern regions, we're encouraged to see early momentum with our new partners, several who joined US earlier in the year already booking orders.
Within our manufacturing operations, our safety culture is now well in grain and we continue to achieve recordable incident rates more than 75% below industry standards.
Having turned our focus to quality initiatives in the second quarter, all our plants exceeded their goal of reducing external quality issued by 50% relative to 2019.
As we now embark on the process of improving the efficiency and cost effectiveness of our operations. We remain on track to complete our significant step function improvement by the end of this year.
And migrate towards a continuous improvement mode next year.
The building that will house, our Carolina plant located 30 minutes from the Charlotte Airport is complete and we received our first shipment of equipment in July.
We remain on schedule for commissioning the plant in the first half of 2021.
Turning to slide eight as you may recall in June 2020, we announced our commitment to an ongoing board renewal process as part of that process I'm very pleased to announce that microport and Sean a king will be joining our board on August.
Michael head of global real estate in security for Microsoft with responsibility for a multibillion dollar real estate portfolio that includes more than 38 million square feet across 113 countries.
As an accomplished professional in one of our target customer segments, namely count intensive businesses.
Brings valuable perspective on integrating technology in real estate with insight into advancements in virtual reality and artificial intelligence.
Sean It was formerly Vice President Finance and business operations for Yale University and prior to that held many leadership positions with Pepsico, including Global Chief Information Officer, and Chief transformation Officer.
In addition, her financial expertise in prior experience as a public company Board member chartered brings insight in perspective on overseeing major transformational efforts and managing implementation of technology.
Today, We also announced and Christine Mcginley is resigning from our board effective August 31st.
This has been a director of dirt since 2013 and was instrument and leaving the board's efforts in relation to our recent NASDAQ listing and related conversion from I have far Esa County to U.S. cap. We thank her for her many years of service.
As of August 1st Michael in China will join the company's audit Committee and channel assumed the role of Audit Committee chair.
The progress we've made in implementing a strategic plan highlighted by the additions to our management team and watching them or make space from possibilities campaign helps to drive our confidence hundreds future.
Much as we're doing everything possible to properly position during the marketplace. The continued economic uncertainty from the global coven pandemic and its impact on the markets, we serve must be acknowledged.
The timing for when the results of our efforts will be realized in our financial performance remains uncertain.
But our determination to exit this period of uncertainty from a position of strength is under term with that I'll turn the call over to Jeff for financial overview.
Thank you Kevin.
Before turning to the quarterly results I'd like to recap the steps we've taken from a liquidity standpoint summarized on slide nine.
As we discussed in our Q1 call early in Twentytwenty, we undertook a fulsome review of our credit facilities.
During the second quarter, we completed the definitive documentation on a covenant holiday for our current credit facility. This holiday extends at September Thirtyth.
At that time, we anticipate that we will either extend that relief or formally convert twin pass it back line depending on the circumstances.
While we currently have 12.8 million available under that facility it remains undrawn.
In the second quarter of 2020, we established Canadian and U.S. dollar to these financing facilities, we true Canadian 3.6 million of the Canadian leasing facility in the second quarter to finance equipment purchased in Canada in 2019.
The U.S. leasing facility will be used to fund the equipment purchases for our New Carolina plant.
We expect to draw on the facility in the late third and fourth quarter of 2020 as the equipment arrived on site.
This includes the financing of $4.7 billion of deposits that were paid in 2019, bringing back cash back onto our balance sheet.
During the quarter. We also qualified for approximately 4.3 million of Canadian emergency wage subsidies from the Canadian government for the April to June period of this about 1.6 million was received in June with the balance expected to be received in the third quarter.
The Canadian government recently passed legislation to extend the availability of Q3 December 19th 2020, introducing a sliding scale to the subsidy relative to the amount of Canadian dollar revenue decline.
We will continue to evaluate or eligibility and intend to apply for such subsidies [laughter] clickable.
Our working capital management focus also continued in the second quarter with no reportable disruptions or delays in accounts receivable collections and a slight improvements in days sales outstanding net of deposits to 29 days.
As a result of these activities. We finished the second quarter with cash balances of 44.6 million a slight increase from the $43.5 million of cash report at March 31st Twentytwenty.
Our net working capital as at June Thirtyth was 52.2 million compared to 51 million at March 31st.
Our current ratio remains healthy at 2.5 times versus 2.4 times at March 31st and 2.7 times at December 31st 2019.
With that background lets now turn to the second quarter results on slide 10.
Revenue for the second quarter was 42.2 million a decline of 34% from the comparable period of 2019, but up marginally from the first quarter.
As Kevin mentioned average daily order entry through Q2 was consistent with Q1 at this level has continued into July.
However, we are not immune to the effects of cobot and the related restrictions, which affected project execution on site.
Estimate approximately 3.7 million of projects that work that we were confident of second quarter delivery at March 15 were deferred to future quarters.
In addition, given our short lead times, there were other opportunities that likely would come to fruition absent cobot that were delayed or deferred.
The amounts of those deferred opportunities however, it's not possible to reliably quantify.
Well the job sites situation remains fluid and regionally dependent, particularly as infection rates surge in certain parts of North America, we expect that to some degree the uncertainty resulting from co, but we'll continue to impact projects through the remainder of Twentytwenty.
On slide 11, adjusted gross profit margin was 38.2% in the second quarter, a decline from 42.1% from the comparable 2019 period and consistent with Q1 of this year.
During the quarter, we reduced the warranty provision related to timber as previously discussed to 1.3 million from 2.5 night as we identified improved and instead choose solution.
Having rightsized our factory labor in Q1 and very early in Q2. This quarter contains no adjustment for costs related to our underutilized capacity within cost of sales recall that in the first quarter of 2020, we separately classified 2 million of underutilized capacity and cost of sales and excluded those costs from us.
Gross profit.
The decrease from the comparable 2019 period is primarily due to fixed cost leverage on lower revenue and approximately <unk> point 5 million of severance costs in the current corridor.
Turning to slide 12, which details the breakdown of operating expenses I would like to specifically discuss the sales and marketing expenses, which vary to a greater degree from comparable 2019 period and from the first quarter of 2020.
Well variable comp commission was down on lower revenue numbers relative to last year. We also benefited from cost reductions and deferrals that came as a direct result of travel and other restrictions due to cope it in particular I would highlight that travel and entertainment expenses and marketing and trade shows were down.
Now a combined 1.3 million, where I'm sure when or if this is this will return to historical levels. It is reasonable however to assume that is economies begin to open up and sales activities return, we would see an increase from current levels.
In addition, marketing and specifically trade shows declined as we deferred hosting our annual connects trade show in June of this year.
Lastly in the second quarter of 2019, we incurred 1.3 million of consulting costs related to the development of our sales and marketing strategy, which did not recur in twentytwenty.
Similarly gene a benefited from lower travel and entertainment as well as reduced building operating expenses, reflecting the work from home status of most of our head office employees.
Operation support reflects reduced travel combined with consulting expenses in 2019 that did not recur.
Looking at Slide 13, adjusted EBITDA and adjusted EBITDA margin for the quarter decreased to point, Threemillion, and 0.6%, respectively, compared to 6 million and 9.4% respectively for the second quarter of 2019.
This decrease was driven primarily by the 10.9 million decrease in adjusted gross profit and point 9 million on account of higher legal costs incurred in 2020.
These reductions in adjusted EBITDA were partially offset by reduced commissions on lower revenues and decreased spending on travel meals and entertainment, including trade shows due to covert 19, as well as cost reduction initiatives.
And 2019, we incurred 1.3 line of consulting costs incurred for sales and marketing plan and point 4 million related to the listing of the company's common shares on NASDAQ in 2019 that did not recur in twentytwenty.
I would reiterate that adjusted EBITDA for the quarter reflects a $1.2 million recovery for the timber provision and lower expenses due to cope it related restrictions I would also note that we removed $4.3 million benefits of the Canadian emergency wage subsidy from the calculation of adjusted EBITDA.
Turning to slide 14, net income for the second quarter was point 3 million or nil per share compared care to net income of 2.6 million or three cents per share for the second quarter of 2019.
This was driven largely by the reduction in gross profit higher stock based compensation, an increased foreign exchange losses, partially offset by 4.3 million of the Canadian emergency wage subsidy reduced SGN egg costs. It described previously and lower income taxes.
To be clear our stock based compensation in Twoq 2020 was 400000 versus a recovery of 1.7 million for the same period of 2019, when we use liability accounting due to temporary cash settlement of options that seized upon our U.S. listing in the fall of 2019.
Excluding the cost of equipment and commissioning of the South Carolina planted described previously and which is largely funded by our new equipment leasing facility. We now expect our ongoing capital expenditures for 2020 to be between eight and $10 million directed mainly towards our Dx t. refresh in Chicago and our new Dx.
See in Dallas commercial systems implementation and software development activities.
Let's now touch on our outlook on slide 15.
Given where dirt fits in the construction schedule typically closer to completion. Our current deliveries are for projects that we're well underway as the cobot 19 pandemic hit North America.
While our average daily order entry levels for July has been consistent with the average daily order entry for the first half of this year.
Outlook for the remainder of the year continues to be very uncertain due to the effects of cope it.
In addition.
While we have made substantial improvements within our commercial organization and have undertaken comprehensive brand awareness activities. The timing of the positive outcomes of these efforts remain send determinable, particularly in light of the cobot environment. We're confident that we will continue to have the balance sheet to support operations going forward, but remain.
Ready to reevaluate potential actions should business conditions deteriorate.
Operator, we would now like to open the call for questions.
Thank you at this time, we will conduct a question answer session for analysts.
A question you want me to press Star one on your telephone.
To withdraw your question press the pound.
Please standby, while we compile beginning roster.
Your first responses from John Wilson of Raymond James. Please go ahead.
Yes. This is Josh thanks for taking my questions Kevin in check.
Yes.
Could you talk about what the current focal points are in the commercial transformation now that all of a jennifers hires are in place and the first phase of the system is that.
It's it's multi fold and it really hasn't changed we still have some conditions, we need to hire within the sales organization. It's working can get people onboarded and effective as soon as possible its continuing to enhance our sales age and sales management.
And then on the system side, it's rolling out our total cost of ownership tool our phase two of our CRM system, which we think will be done by the end of the year as well as the aren't has partner portal and helping our partners with their marketing efforts.
And what progress have you made on the national account side.
Well, we've made good progress we've got several very interesting conversation, so I'm going to taking place.
Variety of different stages, and so we feel very good about our progress today.
Okay, and then what's a sentiment like among your distribution partners on this or any color there, giving you that has changed in any way from three months ago.
Its mixed.
The quoting activity in the core business has really not fallen off dramatically, but what everybody is waiting to see is do those turn into orders for 2021. So.
There's reason to be optimistic because we activity is reasonable, but it was reasonably pessimistic because there's still a little bit of time to go before its turns into order. So I would say probably cautiously optimistic.
Got it I'll hand, it off to others.
Thank you you finish responses from Neil Lyons Dell of industrial Lions Securities.
Hey, good morning, guys.
Yeah actually it my first question you kind of just asked that was really I'm. Just wondering if there's any more color you can give.
The quoting activity obviously with.
Daily Order entry, that's really kind of the last step and you can have a pipeline.
12, 18, 24 months of discussions with clients before you actually get to where you started the lead time on the delivery.
So can you give us any extra color on how that.
Those discussions are developing and if you're seeing a difference between say the health care or the.
The office market government okay.
I don't know that I've gotten great meaningful.
Color to provide.
I would say, we you get flashes of some co good specific things.
We will quote from time to time, the vast majority of more is being in the core business just kind of routine projects, where people are either relocating expanding what they're doing et cetera et cetera.
Part of the struggle that.
Answering your question is that a warning things we've been working on is very much refining how we manage our pipeline what level of activity in quoting.
Merits getting placing the pipeline and so forth and so we don't have really great comparable data to go back and say, okay, a year ago on a comparable basis.
Our activity was X amount of this level. So we're still kind of five at finding our way is that process matures.
Okay, so to sum it up basically cautiously optimistic but most specific segment.
It's really giving you any more confidence about.
Others.
Okay, that's fair that fair way to think about.
Okay, and I know I mean, the situation seems to change day to day or sometimes out of our but when the.
Code that impact is there anything that you're seeing a from the conversations that you are having about how customers are thinking are they thinking about me doing existing office space more or they are thinking about.
New.
New developments and those are you know might be on hold but now they're thinking about going into them, but with a different kind of mindset and anything like that you're saying.
Yeah, and yes, and you really need to have a dichotomy.
When you have conversations about longer term projects and how they're thinking about executing those projects going forward there much more interested in prefabricated and offside and kind of gets to the prepared remarks were now we're having direct conversations about people being concerned that I just.
Spent millions of dollars on a go through wrong space and so that's what gives us optimism for the long term business model and where we will ultimately go ahead and being able to convert people tar way of building.
In the short term people are still feeling there way, they're still trying to figure out okay. Howard My people doing in work from home and you can see even in the popular PRASM and we're seeing this with our client conversations as well, which is at first it was kind of a new found cautious just great and now it's starting to wear on people and they're starting to evaluate so we need to do so.
In different I think we're going to go through waves like that I think you're good at waves, where people do very quick inexpensive and particularly great solutions, and then they're going to say well I need to figure out how to live with this for a while and then I think that's where we may come in in wave two of we need to quarter space together in a way that is more sustainable way to work, but also gives us the.
Flexibility to make changes going forward.
Yeah, I definitely think witness environment should be should be favorable for your offering.
So maybe just finally have you seen any kind of interest in.
More face to face meetings or I'm wondering when that sales and marketing expense line might start to uptick any visibility on that at all.
It's hard to say, we're seeing local travel our people and into market by market basis, and we're really relying on the individual judgment, but its our people in their local markets traveling differentials have to recognize is that there's still a very strict 14 day quarantined.
Period for somebody traveling from the United States into the province of Alberta, where our calorie operations are based and so you're not seeing travel either Canadians coming down in the United States, knowing that they've got to get home or vice versa, and so that's a significant portion of expenditure that I don't think you'll see change much.
Until that quarantine restriction is lifted.
I think to add to that Neil is that said there are face to face conversations that are happening within within the regional the regional areas.
We have a.
Widely dispersed sales force that that effectively partners with our distribution partners and quite frankly, our distribution partners also have a salesforce underground as well.
Which are which is complementary and so.
I think as those those conversations are starting to happen, but but certainly the air travel and those sorts of things even for guys. Like me guys like Kevin are tapping as well so.
Okay. Appreciate it thanks.
Again to ask a question. Please press star one on your telephone keypad.
Your next responses from Rupert Merer of National Bank. Please go ahead.
Good morning, everyone.
Hi, Robert <unk>.
So with the reduction in operating staff in the last quarter, you talk about your production capacity today carrying much excess capacity and you have the ability to flex up or down anymore. At this time.
We typically excuse me capacitized ourselves to be able to swing.
On the week to week basis, 15% to 20%. So we've got some.
Some slack capacity in the system, but to go much beyond that would require us to to increase our staffing levels, it's not a and equipment or facilities restrain it's purely gum with people.
And with building the new facility. So you target 10 half million of investment. This year what are the plans right now for the facility in light of your lower production levels, how how far do you take this facility are really ultimately operate this facility once its commission.
As it as it stands or or do you think that maybe maybe he'll slow things down to that.
We will fully commissioned and operated.
Cost spaces, particularly on the logistics and played savings for southeastern jobs is very compelling and the incremental cash expenditure, particularly with capital lease financing was was not overly meaningful and so there's not a difficult decision to say after you set aside.
Got it or we will contractually committed to what would the incremental cash from our balance sheet need to be in order to get it fully functioning and capture those savings and the activity level to make that good investment is not particularly high.
Hi, Thanks, So then turning to your distribution partners. So you added five this quarter.
Produced by three you mentioned that somebody the new partners are already contributing.
In the order flow can can you talk about how the activity levels burying across the network are you seeing.
All of your distribution partners, all trading or are there. Some that are off line now and are there any that are or maybe seeing stronger order flow in this market.
The ones that are have the most reduced activity, although it's starting to change, but if you look at around the corner basis would be like New York and Boston in Northern California.
Where jurisdictional job sites are pretty much shutdown.
So those are starting to open up more so you're seeing a little bit more there.
Beyond that it really is project based and so at any point in time, it's somebody it has a large project that they've been working on I don't know from a quoting standpoint, if there's any place we could highlight where one is more.
Motivating are having a higher quoting and experience going anywhere else.
And your your presentation shows you have 80 distribution partners now how does that changed over the last couple of years lightly.
Whereas the number has come from and where do you think you go here you go from here do you look to increase the number of distribution partners for others. There are a benefit to doing so.
I'm going to like would hurt to answer that question in detail and just share with you that we kind of been changing how we how we calculate that number I'll check into more detail interim here strategically by and large what we've gone is one or two things either upgrading a an underperforming.
Partner or adding partners to get enhanced market coverage ideally, we would have to existing partners increased the business that they're doing and help them in support them doing that in places, where we think there we're underpenetrated and that's not likely we are prepared ocata distribution partner.
Yeah, I'd say report, we're probably up a net net for next five.
Relative to where we're a couple of years ago.
So we've added a we've added a number but we've also remove the some lower performing partners. So I'd say.
I'd say that it's it's an improvement in the quality of the network and we are slightly higher but not by a material amount.
All right I'll leave it there thank you.
Thank you your last question is from Greg Paul.
Hallum Capital Group. Please go ahead.
Hi, guys as Danny Irish on for Greg today.
No you gave the comments on kind of average daily order throughout Q2 I was wondering if you could give some color on.
Maybe some monthly order trends as you saw as we move throughout the quarter.
Just here you know if it was it was fairly consistent I'd say, we saw A.A., perhaps a slight slowdown a mid quarter.
It it bumped up a little bit into June, but it's been it's been very.
It's been quite variable we've seen some some really strong order days we've seen.
So really weak quarter days.
And so it's it's difficult to shoot to see a pattern apart from looking at an overall weekly basis, and then that weekly basis. Its it has definitely held in there.
To that extent.
All right got it I guess as we look forward to kind of the pipeline for Q3, what's your feel around the potential for you know additional project delays that you expected to hit in Q3 kind of somewhere like to like to 3.7 that you saw this quarter.
That's that's really tough to say I think it's got here, it's really tough to say you know I I think.
We've we've seen some stuff move around a certainly I'd expect you know it would be.
Around that level, but it is really regionally dependent it's really project dependent.
And so I I would say you know you you could you could probably have a rolling number somewhere around that 3.7, perhaps little it little bit less in the third quarter, but.
I think work and it continues to see this moving forward and and.
It's it's super fluid, particularly if you get an outbreak on a construction sites or if you get us to be that goes to lock down or stuff like that so.
Great and then last one from me I'm just looking at your distribution partners. How are you seeing I guess kind of the health and stability as some of those are you concerned with that at all.
Data set there I know, we're not I'm you know we've been keeping very close tabs.
With the with our partners.
If we were seeing problems you would've seen an uptick in our allowance for doubtful accounts, which you did not see this quarter.
And in fact, as I said idea so it has gone down.
We're continuing to have ongoing discussions our partners themselves have also had to take appropriate actions within their businesses.
To make sure that that to they remain healthy.
And are able to to move forward and many of them many of them half so.
All right that's a that's it for me thanks guys.
Thank you there no further questions in the queue at this time.
Thank you operator, as you've heard we've come a long runway in recent months before closing I'd like thank our tremendous employees and partners, who demonstrated resiliency and commitment in the face of extraordinary circumstances their dedication to dirt and our collective mission is the foundation of everything we do thank you for joining us today.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect have a good day.